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Working Paper No. 63. The Long-Term Relationship between Capital and Earnings in Banking: Sweden 1870–2001

PublikationWorking paper
Företagandets villkor, Leverage, Per Hortlund
Working Paper No. 63.
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Sammanfattning

Contrary to received wisdom, two recent studies report a negative relationship between leverage and profitability in banking in the 1980s and early 1990s. This study presents new data on the leverage and profitability of Swedish commercial banks in 1870–2001, and explore the sign of the relation-ship in the long term. In the studied period, the capital-asset ratio decreased by a factor four, while return-on-equity more than doubled. The Leverage Formula postulates a positive linear relation between return-on-equity and the debt-equity ratio. A strong positive linear relationship was found over the period 1871–1980, but not in 1980–2001. Thus, while supporting the re-sults of the previous studies, a long-term “normal” positive relationship be-tween leverage and profitability is also reaffirmed.

Hortlund, P. (2005). The Long-Term Relationship between Capital and Earnings in Banking: Sweden 1870–2001. Ratio Working Paper No. 63.

Baserat på innehåll

Working Paper No. 69. Does Inflation and High Taxes Increase Bank Leverage?
Working paperPublikation
Hortlund, P.
Publiceringsår

2005

Publicerat i

Ratio Working Paper

Sammanfattning

Does the combination of inflation and high corporate taxes explain the increase in bank leverage in the 20th century? Inflation automatically increases bank debt, while high corporate taxes hinder capital accumulation. Capital ratios therefore drop, until leverage-induced returns are sufficient to uphold them at constant levels. This theory was confronted with Swedish bank data 1870–2001. Bank capital ratios dropped when inflation and corporate tax rates were high, during WWI and in 1940–1980. The theory can explain the sinking bank capital ratios during these periods, but also their relative stability since the early 1980s. High corporate taxes and inflation were estimated to account for half of the drop in Swedish bank capital ratios since WWII.

Working Paper No. 69. Does Inflation and High Taxes Increase Bank Leverage?
Working paperPublikation
Hortlund, P.
Publiceringsår

2005

Publicerat i

Ratio Working Paper

Sammanfattning

Does the combination of inflation and high corporate taxes explain the increase in bank leverage in the 20th century? Inflation automatically increases bank debt, while high corporate taxes hinder capital accumulation. Capital ratios therefore drop, until leverage-induced returns are sufficient to uphold them at constant levels. This theory was confronted with Swedish bank data 1870–2001. Bank capital ratios dropped when inflation and corporate tax rates were high, during WWI and in 1940–1980. The theory can explain the sinking bank capital ratios during these periods, but also their relative stability since the early 1980s. High corporate taxes and inflation were estimated to account for half of the drop in Swedish bank capital ratios since WWII.

Working Paper No. 67. Clearing vs. Leakage: Does Note Monopoly Increase Money and Credit Cycles?
Working paperPublikation
Hortlund, P.
Publiceringsår

2005

Publicerat i

Ratio Working Paper

Sammanfattning

The effects of note monopolisation on the amplitude of money and credit cycles are studied. Note monopolisation trades clearing for leakage. If the central bank’s reserve ratio is larger than that of the commercial banks, and if the currency-deposit ratio is sufficiently large, the leakage effect could domi-nate the loss-of-clearing effect (base expansion), such that the credit capacity of the banking system decreases. This was the case when the Bank of Sweden gained a note monopoly in 1904. Money and credit cycles should therefore have become smaller. Swedish bank data for 1871–1938 reveal that money cycles became smaller, but credit cycles larger. The latter is attributed to an increasing time-demand deposit ratio, which increases the credit capacity of the banking system.

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